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Fixing the finances of power distribution companies (discoms) will reduce the ability of Indian states to spend on developmental activities which supports economic growth in the medium term, said a study of state finances by the Reserve Bank of India.

“Although the effect may not be instantaneous, state finances may come under stress in the coming years on account of burgeoning liabilities due to takeover of 75% of the existing debt of discoms,” RBI said in its report titled State finances: A study of budgets of 2015-16 released on Thursday.

Under the Ujwal Discom Assurance Yojana (UDAY) launched by the central government, states that opt for the scheme are mandated to take over 75% of the liabilities of their power distribution companies by converting loans into state guaranteed discom bonds.

“This would considerably reduce the fiscal space of states which might lead to curtailment of capital expenditure with an adverse impact on growth,” said the report.

This move will not only increase the debt of states but also their interest payments, which will swell in the coming years, RBI said.

States would be forced to deviate from the discipline on spending that they adhere to under Fiscal Responsibility and Budgetary Management (FRBM) rules, the central bank said.

The outstanding loans of all power discoms in the country were Rs.4.3 trillion as of September.

A total of 15 out of 29 states and Union Territories have voluntarily joined UDAY, covering 90% of the total debt of discoms, the central bank’s report noted. These 15 states are Uttar Pradesh, Bihar, Odisha, Maharashtra, Andhra Pradesh, Himachal Pradesh, Madhya Pradesh, Uttarakhand, Chhattisgarh, Jammu and Kashmir, Jharkhand, Gujarat, Punjab, Haryana and Rajasthan.

“Reforming state-level public enterprises and the proposed implementation of the consumption-based destination-centric goods and services tax (GST) can strengthen state finances,” said the report.

Incidentally, developmental expenditure, especially towards education and health care has taken a hit as states returned to the FRBM discipline in fiscal 2016.

Aggregate capital expenditure of states has remained almost stagnant over the years as a proportion of gross states domestic product (GSDP), the report noted.

“A disconcerting feature is the stagnation in expenditure on education and health,” RBI said.

Gross fiscal deficit of states narrowed to 2.4% of GSDP in fiscal 2016, as per the budget estimates of states, from 2.9% in fiscal 2015, the report said.

In contrast, net market borrowings of states have increased by 26% in fiscal 2016 even though their deficits narrowed and cash surplus increased. According to the report, states had an aggregate cash surplus of Rs.1.88 trillion as of 31 March, RBI said.

Analysts have expressed concerns over state finances in recent months, particularly the increase in their market borrowings.

“Budgets of 14 states accounting for around 75% of India’s GDP highlight that the states’ finances will be strained in FY2017,” said Kotak Economic Research in a report on 29 March. “Some of the states have relaxed their FRBM targets of GFD/GDP to 3.5% given the additional burden of servicing the UDAY bonds.”

“The recent surge in the state market borrowings is expected to keep the pressure in the bond markets intact,” the report went on to say.

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About Us

"Power Advisor" is a one of its kind initiative in the Indian Power Sector to offer "Quick & Detailed Answers" to the most common questions related to the Indian Power Market. Wherever needed we also provide all the necessary support in analyzing the specific details of the problem from all possible dimensions.